Costco's Growth Strategy

For a chain such as Costco Wholesale Corp., cooperating with malls has suddenly become an important part of its growth strategy. In the past year, the discount juggernaut has opened its first two mall units, and the chain currently is talking to 30 more shopping centers.

Costco chairman Jeffrey Brotman says malls will play a vital role for the company in cities such as Los Angeles. With 25 stand-alone stores already in the Los Angeles basin, Costco would like to add another five units in the area, but is having trouble finding quality sites.

“Somebody recently came to us with a proposal for a redeveloped mall site in West Los Angeles, and we were very interested,” says Brotman. “The mall is in a desirable area that we haven't been able to penetrate before.”

A year ago, Costco opened a store at Spotsylvania Mall in Fredricksburg, Va. Since then, the mall reports double-digit sales gains. Ironically, the biggest revenue increases came from jewelry sellers, which compete in one of Costco's strongest categories. Even clothing stores reported double-digit gains, an important achievement at a time when the segment is flat in many markets. The mall reports that Costco is helping to increase traffic and encouraging high-income customers to drive long distances in search of bargains.

A discounting powerhouse, Issaquah, Wash.-based Costco has grown by offering upscale merchandise at low prices. The chain surprises customers by shifting its selections constantly, one day offering $20,000 diamond rings and the next a stack of high-end chandeliers.

Apparently, the strategy works. Costco (NASDAQ: COST) reported a 14% increase in net sales during the first 31 weeks of its 2004 fiscal year, ending April 4. On a year-over-year basis, net sales for the period rose from $24.44 billion to $27.79 billion. The discounter currently operates 319 stores in the U.S. and Puerto Rico, and has 113 stores abroad. It plans to open eight to 10 units by Aug. 29, the end of its current fiscal year.

Because Costco's merchandise is so different from what appears in conventional department stores, Brotman argues that Costco doesn't necessarily steal sales from existing mall tenants. “We attract people who never came to the mall before,” he says. “Besides visiting Costco, they go to the other stores in the mall.”